How short-term loans differ from traditional loans

Short-term loans and traditional personal loans can both provide consumers with needed cash. They provide a lump sum immediately that is paid back over a specific period of time. Both types of loans typically do not require collateral, or something pledged as security for repayment of the loan. They are, however, different loan products and they operate differently.

  • Short-term loans, also sometimes called small-dollar loans, are typically paid back over a shorter period of time than traditional loans. For example, a traditional loan might be $5,000, payable over a five-year period while a short-term loan is typically less than $1,000 and is payable in less than a year, or, in some cases, within a few weeks or months.
  • Short-term loans typically are at a higher interest rate than traditional loans. The higher the interest rate, the more money the consumer will ultimately end up paying back. While generally, consumers should opt for the lowest interest solution, short-term loans can be the best option in certain circumstances.  Sometimes consumers just need a little money, for example, or cannot qualify for a traditional loan. Just as lenders vary in the rate they charge for traditional loans, lenders will vary in the interest rate charged for short-term loans. Shopping around for the best interest rate among short-term lenders can save a lot of money.
  • Short-term lenders often use alternative credit scoring models while traditional lenders typically use credit scores generated by the three major credit bureaus. PRBC (Payment Reporting Builds Credit) is the largest non-traditional credit reporting agency. Consumers can register with PRBC and gain access to an alternative credit score.  Alternative scoring models, such as PRBC, help prove the creditworthiness of individuals who may have experienced financial challenges that lowered their traditional credit scores or who have not established a sufficient history with traditional credit bureaus. 
  • Short-term lenders typically approve loans instantaneously and can quickly deposit the money into your bank account. Traditional loans generally have a longer approval and funding process.
  • Short-term lenders use different criteria in determining whether a consumer qualifies for a loan. This means that consumers who are turned down for traditional loans often qualify for short-term loans. To qualify, borrowers typically need a valid bank account and a minimum verifiable income, which varies based on the lender and the amount of the loan.

If used responsibly, short-term loans can help consumers through emergencies such as a leaky roof or car breakdown and help them move toward greater financial health.

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